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A settlement agreement reached last
month between Citigroup and the Securities and Exchange Commission (S.E.C.)
over a 2007 mortgage derivatives deal has been thrown out by a federal court
judge who has ordered the case be sent to trial. Under the settlement announced on October 19,
Citicorp had agreed to pay $285 million to settle a civil suit arising out of
the sale of $1 billion in mortgage-linked collateralized debt obligations. The 2007 transaction took place just as the
housing market was about to collapse, costing investors $700 million. Citigroup is alleged to have handpicked the securities
and simultaneously wagered that some of the mortgages would fail while
profiting by $160 million from the deal.

In a written statement Monday, Judge
Jed S. Rakoff of the U.S. District Court in Manhattan, said that the proposed
settlement was "neither
reasonable, nor fair, nor adequate, nor in the public interest" because
permitting a company to neither admit nor deny the charges against it does not
satisfy the law. The limited information offered in the
settlement, he said, made it difficult to discern whether the S.E.C. was
getting anything from the settlement "other than a quick headline."

Settling claims in such a manner has
become commonplace for the SEC and Rakoff said it "creates substantial
potential for abuse because it asks the court to employ its power and assert
its authority when it does not know the facts."

Citigroup
Director, Brian Stoker is contesting similar charges to those made against
Citigroup by the S.E.C. Rakoff has
joined the two cases and ordered a trial to begin on July 16, 2012.

The
settlement rejected by the judge would have required the bank to return the
$160 million in profits it received from the transaction, an additional $30
million in interest, and pay a $95 million fine for its negligence. Reuters points out this is less than
one-fifth the amount assessed against Goldman Sachs last year in a S.E.C.
settlement growing out of a similar transaction.

Rakoff
said that if the allegations against the bank are true, the settlement was a
very good deal for Citigroup.

Neither the SEC nor Citigroup have
as yet commented on the judge's decision.

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